1. Profile of Director: The Case of Korea
3rd Asian Roundtable on Corporate Governance
OECD
The Role of Boards and Stakeholders in Corporate Governance
4-6 April, 2001
Singapore
Hasung Jang
Korea University / PSPD
Phone: Fax:

2. New Regulation on Board Composition
Outside Director
All public company’s board should be comprised at least 25% outside directors
Financial Institutions & public companies with assets over 2 tr won, at least 50% outside director
Outside Director Nomination Committee
Mandatory for public companies with assets over 2 tr won and security brokerage companies.

3. New Regulation on Board Composition
Audit Committee
Public company with asset larger than 2 tr won ($1.7bil)
2/3 of the committee should be outside directors
3% voting right limit for election of committee member (2001)
Cumulative Voting System
Opt-out system

4. New Regulation on Director
Fiduciary Duty of Directors
Explicitly Stated in Commercial Code
Shadow Director’s Liability
Controlling Shareholder’s Liability Acknowledged
Minority Shareholder Rights Strengthened
Filing Derivative Suit % % %
Requesting Termination % % %
of Directors and Auditors

5. Qualification of Outside Director
Security Exchange Code Defines Negative List
List is to Preclude Individuals Who have Direct Conflict of Interest.
Person who has a “special” relationship with the largest shareholder
Major shareholder of the company or that person’s spouse or lineal ascendant or descendant

6. Qualification of Outside Director
Person who is an executive or full-time employee of the company or any of its affiliated companies or who was one for any of these companies within the preceding two years
Spouse or lineal ascendant or descendant of an officer or director of the company
Officer, director or full-time employee of a company that has an “important business relationship,” or who was one for any of these companies within the preceding two years

7. Qualification of Outside Director
Officer, director or full-time employee of a company in which an officer, director or employee of the concerned company is a non-standing director
More challenging question is whether similar qualification should also be established for inside directors who has more of interest conflicts than outside directors

8. Composition of Board Number of Company (736) (701) (693)
Number of Company (736) (701) (693)
Executive Directors , , ,601
(88.6%) (75.2%) (69.2%)
Outside Directors , ,418
(11.4%) (24.8%) (30.8%)
Auditors , ,
(89.7%) (87.9%) (90.3%)
Outside Auditors
(10.3%) (12.1%) (9.7%)

9. Composition of Board

10. Persistent Problems with the Board
Self Dealing of Directors
Fiduciary duty not enforced
More interest conflict than outside directors
Entrenchment of Management through Affiliates’ Ownership
Controlling shareholder own less than 4%
Equity investment into affiliates increased substantially

11. Persistent Problems with the Board
Cumulative Voting Opted Out
Top 30 Chaebols : 92% excluded
Non Chaebols: 76% excluded
Independence of Outside Director in Question
Majority are chosen by controlling shareholder & Mgt.
Rubber Stamping
Poor Attendance

12. Persistent Problems with the Board
Attendance Rate of Outside Directors
1st Half nd Half st Half 2000
43.9% % %
Who Selected Outside Director?
Controlling Shareholder % %
Management % %
Creditor Banks % %
Others % %

13. Attendance of Board Meetings Samsung Electronics Co.
Number of Meetings
KH Lee Chairman
HS Lee Chairman’s Secretary
IJ Kim Chairman’s Secretary
JY Yoon CEO
DS Choi CFO
SH Lee Director
KT Lee Director
SR Lim Outside Director
F Hirlinger Outside Director
Iwasaki Outside Director

14. Obstacle on Independent Board
Concentrated Ownership Structure
Circular Equity Ownership
Pyramidal Equity Ownership
Passive Local Institutional Shareholder
Investment Institutions are owned by chaebols
“Corporate Account” in Investment Institutions
Complex and Costly Proxy Procedure
Election of outside director is practically impossible

15. Case: Election of Outside Director
Case 1: Samsung Electronics Co.
Minority shareholders propose outside director candidate, but failed in proxy contest
16% of supports mostly from foreign institutions
Could have been successful if cumulative voting
Case 2: SK Telecom, Hyundai Heavy Ind.
Elected 2 outside director at SKT, 1 at HHI
Cooperation from management and major foreign shareholders

16. Management Entrenchment through Ownership by Affiliates Top 10 Chaebols: Listed Companies

17. Circular Equity Ownership: Hyundai Group
Kia Motors
H Securities
H. Precision
Hyundai Co.
H Elevator
H. Motors
H. Heavy Ind
H Shipping
Mipo Shipyard
H Financing
Ulsan Merchant Bank
H Construction
H. Steel Pipe
Inchon Steel
H Electronics

18. Pyramidal Equity Ownership: Samsung Group
Samsung Elec
Samsung Corp
Samsung Life
Cheil
Comm.
Samsung
Heavy Ind.
Samsung
Foudation
Samsung
Mech. Elec
Samsung SDI
Samsung
Security
Samsung
Everland
Hotel
Shilla
Samsung
Card
Samsung
F&M Ins
Samsung
Engineering
Samsung
Techwin
Samsung
Prec.Chem
Samsung
Capital
Cheil
Textile

19. Case: Election of Outside Director
Case 1: Samsung Electronics Co.
Minority shareholders propose outside director candidate, but failed in proxy contest
16% of supports mostly from foreign institutions
Could have been successful if cumulative voting
Case 2: SK Telecom
Hyundai Heavy Ind.
Elected 2 outside directors at SKT, 1 at HHI
Cooperation from management and major foreign shareholders

20. Independence of Outside Director in Question
Case 1: Samsung Electronics Co.
Board Approved Debt Guarantee of Chairman Lee’s Personal Liability
Case 2: Samsung SDI
Board Approved Purchase of Shares of a Private Company Owned by Chairman’s Son
Case 3: Hyundai Heavy Industry
Board Filed Law Suit against Affiliated Companied to Recover Loss

21. Case 1: Board Approve Debt Guarantee of Chairman's Liability
Creditor
Banks
Default Loan $2.5 BIl
Samsung
Motor
Samsung
Electronics
Debt Guarantee
Collateral
Samsung
Life Ins.
Samsung
SDI
Loss $1.7 bil
at $200/Sh
4 mil Shares
at $635/Sh
Samsung
Mech. Elec.
Penalty Interest
$487/year
Chairman
KH Lee
Samsung
etc.

22. Case 2: Board Approve Purchase of Shares Owned by Chairman's Son
Samsung SDI
Board Approved Unanimously
Purchase Amount: bil won ($2.8 m)
3 Days Share Value Loss: bil won ($341.6m)
Market adjusted price change: %
Cheil Communication Co.
Purchase Amount: bil won ($16.1m)
3 Days Share Value Loss: bil won ($58.6m)
Market adjusted price change: %

23. Case 2: Negative Effect on Share Price

24. Case 3: Board Acting Independently from the Group Affiliation
Hyundai
Electronics
$200Mil
Hynudai
Securities
Debt Guarantee
CIBC
Law Suit!
$200Mil
Debt Guarantee
Debt Guarantee
Hyundai
Heavy Ind.

25. Case 3: Positive Effect on Share Price Board Acting Independently
Hyundai Heavy Industry Board Acting Independently
Hyundai Motors Co. Separated from the Group
KOSPI HMC HHI HCE HEI
Jan 4:
Mar 14: Family Feud Started
May 31: HMC Revolt
July 28: HHI Law Suit
Aug 31: HMC Separated
Oct 31:
Jan 31:
Mar 16:

26. Case 3: Positive Effect on Share Price
Family Feud Started
HMC Separation
HHI Law Suit

27. Possible Solutions Cumulative Voting Ownership Diversification
It should be mandatory for countries where ownership is concentrated
Only way to elect independent director of minority shareholders’ choice
Ownership Diversification
Stricter Listing Requirements on Ownership Diversification

28. Possible Solutions Increasing Liability of Directors
Derivative suit should be allowed for any shareholder
Security class action suit should be allowed
Independence of Executive Director
Independence qualification of executive director should be defined similar to one of outside director
Independence from controlling shareholders

29. Possible Solutions Director’s Term Should be Shortened
One/Two year term: Re-election every year
All Directors’ term should expire at the same time
Incentive Compensation
Stock option to directors
Compensation committee solely by outside directors

30. Possible Solutions Pro-Active Role of Institutional Shareholder
Independence of local institutions
Corporate finance section should be separated by “Chinese Wall” from equity investment section
Active involvement of public pension fund
Pro-active voice from foreign shareholders
Rule of “Sell it if you do not like management” does not work in emerging markets

31. Possible Solutions Market for Outside Directors Separation of
Education for Directors
Assignment system from the “certified pool”
Separation of
Ownership of “Financial Institution” from Ownership of “Industrial Company”